Hedge funds and mutual funds — two of the largest groups of investors — invested in a handful of the same stocks last quarter in anticipation of a shift in market leadership and higher volatility, according to Goldman Sachs. The Wall Street bank analyzed the holdings of 693 hedge funds with $2.8 trillion in total equity positions and the holdings of 554 mutual funds with $3.7 trillion in equity assets at the start of the third quarter, based on regulatory filings. It then compiled a “Hedge Fund VIP Basket,” consisting of the 50 stocks that appear most often among hedge funds’ top 10 holdings, and an “Overweight Mutual Fund Basket,” consisting of the 50 stocks where mutual funds are most heavily weighted. Goldman found eight “cross-favorites” among hedge funds and mutual funds in the fourth quarter. Those cross-favorites are up 17% so far this year, in line with the broader market. The overlap between hedge funds and preferred mutual funds has a history of outperformance. Goldman Sachs said the basket has outperformed the S&P 500 in 61% of the months since 2013, with an annualized gain of 3 percentage points. The list includes credit card giants Visa and Mastercard and building materials company CRH. Notably, Third Point’s Dan Loeb used to own Dublin-based CRH and said he was bullish on companies in the “physical world” at attractive prices. Both hedge funds and mutual funds also like health care company UnitedHealth and insurer Progressive. Insurance stocks have been on the upswing lately as their earnings outlooks normalize — and in some cases improve — as the effects of the Covid-19 pandemic fade. Overall, hedge funds and mutual funds reduced their exposure to the winning tech names by the end of the second quarter. Goldman Sachs found that the weighting of the so-called Magnificent Seven stocks in hedge fund long portfolios fell for the first time since 2022. Mutual funds also became more bearish on these tech stocks, underweighting them in their portfolios. The shift in their positions helped mitigate the effects of the summer selloff in the Magnificent Seven stocks. At the same time, both groups of investors increased their allocations to health care, which offers defense and growth that are largely unrelated to the AI boom, Goldman said.
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